New Family Savings Act: What You Need to Know
By now, you’ve probably heard that the House of Representatives voted to approve the Family Savings Act (H.R. 6757) in September, which would alleviate some of the compliance restrictions imposed on employer-sponsored retirement plans with the goal of boosting retirement savings for employees and simplifying defined-contribution rules. The bill was introduced in the House after President Trump issued an executive order on September 10th, as part of a package of bills nicknamed “Tax Reform 2.0”, calling to allow open multiple-employer plans (MEPs) where unrelated employers can participate together in the hopes of stimulating retirement savings for citizens. The bill includes 11 of 33 provisions outlined in a more encompassing bill called the Retirement Enhancement and Savings Act (RESA, S. 2526), currently awaiting a vote in the Senate before the end of the year.
The Family Savings Act “is a significant step towards enactment of much-needed comprehensive retirement security legislation,” according to Chatrane Birbal, The Society for Human Resource Management’s (SHRM) director of congressional affairs for health and employee benefits policy. Birbal elaborates that the bill “will provide small employers the ability to offer retirement savings benefits to their employees by eliminating barriers which restrict[s] the types of employers who are permitted to band together to offer a retirement plan through a MEP (multiple-employer plan).”
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- It would make it easier for small businesses in different industries to cooperatively participate in common, or open, MEPs, which tend to be less costly and burdensome than single-employer plans. Currently, the system only allows “closed” MEPs, where participating employers share organizational relationships, such as in established trade associations located in specific geographical locations.
- It would protect employers in a shared retirement plan from Employee Retirement Income Security Act (ERISA) liability if a single employer in the closed plan was to be noncompliant, otherwise known as the “one bad apple” rule.
- It would provide a safe harbor for selecting annuity providers, a marked change from the original Family Savings Act, which did not protect retirement plan sponsors from liability if they sensibly selected an annuity provider, a criterion that the proposed RESA bill would offer. The bill has now been amended to explain how plan sponsors can satisfy the fiduciary responsibilities they bear when choosing annuity providers.
- It would preclude employees over the age of 70½ from having to take required minimum distributions (RMDs) from qualified retirement plans, such as 401(k)s or individual retirement accounts (IRAs), if the assets in the combined retirement accounts do not exceed $50,000, as well as reduce RMDs for larger account holders.
- It would allow families to access their 401(k) and similar accounts to pay for expenses related to a new child, whether through natural birth or adoption, providing the flexibility to replenish those accounts in the future without penalties being assessed.
- It would expand Section 529 education accounts to pay for apprenticeship fees to learn a trade, cover the cost of home schooling, and aid in the paying-off of student debt, in addition to its traditional usage for college tuition/fees.
- It would allow employees who have an annuity in a 401(k) or similar plan to transfer or rollover to an IRA retirement account without paying taxes or surrender penalties on the transferred amount.
- It would address a long-standing complaint by sponsors of “frozen” defined-benefit pension plans that have since been closed to new hires. It would also alter pension nondiscrimination rules by permitting older, generally higher-paid employees with longevity to continue to accrue benefits under a plan, even though younger, generally lower paid employees with less service are not accruing these same benefits.
- It would create a new universal savings account, where participants could make annual contributions of up to $2,500 of after-tax money into bonds and equities, which would have the ability to accrue without being taxed. Also, this money could be withdrawn tax-free at any time for any reason or cause, not just at retirement.
It is important to note the political leanings and impacts of the bill. “There is strong bipartisan interest in addressing retirement security in Congress, and that gives them a real chance at passing something this year,” said Geoff Manville, Principal in HR consultancy for Mercer’s law and policy advisory group. There has also been a legislative alert issued by Buck, a benefits consultancy, stating, “Although it is unlikely that the House and Senate will finish work on a conference before the elections in November, observers seem confident that Congress will come to agreement by year end.” A retirement plan advisory firm called October Three Consulting seconds this, posting encouraging sentiments about RESA online: “[It] has broad support in the Senate. Its leading sponsor, Senator Hatch, one of the leaders on retirement policy in the Senate, is retiring at the end of the current Congress, and passage of RESA (or something like it) before he leaves is likely to be one of his priorities.”